Polinomics: Insured to fail?

The more things change, the more they remain the same. The hypocrisy of the two largest political parties in the country, the Bharatiya Janata Party and the Indian National Congress, stand thoroughly exposed because of the manner in which their representatives have been wrangling over the issue of increasing the cap on foreign investment in Indian insurance companies from 26 per cent at present to 49 per cent. At one level, representatives of the two political parties are indulging in “opposition for the sake of opposition”. At another, there is internal dissension within the parties on the merits of allowing international insurance conglomerates to increase their stakes in Indian companies.

The Narendra Modi government wants to convey a strong impression that it welcomes foreign investors. International insurance companies see strong long-term business prospects in a country like India with its demographic profile heavily weighed in favour of the young who are future buyers of insurance policies. Not surprisingly, they have been lobbying hard to hike their equity holdings in Indian insurance companies. The government wants to oblige them by pushing through the amendment to the insurance law before the Prime Minister visits the US in September. But the going has not been smooth. The Modi government is having to cope with opposition to foreign investment from the “swadeshi” elements within the Sangh Parivar.

An insurance policy is a long-term contract and funds of insurance companies can typically be deployed for infrastructural projects. This is what all governments want. The problem with private insurance companies, including foreign firms, is that they wish to maximise profits which come from policies sold to relatively well-off sections of the population. Such firms, thus, are less concerned about the poor or “financial inclusion”.

Insurance was the last segment of India’s financial sector that was barred to foreigners. The government, first under Jawaharlal Nehru and then under his daughter Indira Gandhi, had nationalised the life insurance business in 1956 and the general insurance business in 1972. Foreign firms were allowed to operate in very restricted areas like shipping re-insurance. Two monolithic public sector organisations — the Life Insurance Corporation and the General Insurance Corporation — with four subsidiaries completely controlled the insurance business in the country.

In 1994, an official committee (set up during the P.V. Narasimha Rao government and headed by the former governor of the Reserve Bank of India, R.N. Malhotra) recommended that the government allow private firms to compete with these state-owned monopolies after the establishment of a suitably empowered regulatory authority. But for the next few years different governments dilly-dallied on the question of opening up the insurance sector to competition from private firms.

In February 1997, P. Chidambaram, finance minister in the United Front (UF) government, allowed private companies to offer health insurance policies for the first time. In August 1997, the government headed by I.K. Gujral moved a bill to set up an Insurance Regulatory and Development Authority (IRDA), but this was withdrawn because of strident opposition not only from the Left parties, but also the BJP. The BJP said that it was not averse to private Indian companies entering the insurance business, but was not favourably inclined towards foreign companies getting into this industry.

In June 1998, Atal Behari Vajpayee’s finance minister Yashwant Sinha proposed in his Budget speech that private domestic insurance concerns be allowed to enter this sector, leaving open the question of whether (and to what extent) international insurance companies could enter India’s insurance industry. In October 1998, a high-powered group of ministers led by Jaswant Singh (then deputy chairman of the Planning Commission), decided that foreign companies (including FIIs, NRIs and overseas corporate bodies controlled by them) would be allowed to hold up to 26 per cent of the equity capital of privately-controlled insurance companies. This important recommendation had been made earlier by a committee of parliamentarians headed by the Congress’ Murli Deora.

In 1998 and 1999, sections within the Sangh Parivar vehemently opposed foreign investment in the insurance sector. There was much drama on this issue. During a meeting of the BJP top brass, Mr Vajpayee had to tell youth and sports affairs minister Uma Bharti (who had opposed the government’s decision on insurance) to shut up and not interrupt him. Mr Vajpayee’s view prevailed and the hard-liners were marginalised. But the insurance bill moved by the government could not be passed by both the Houses of Parliament.

After the BJP-led NDA coalition was re-elected in October 1999, the Vajpayee government did succeed in pushing through the bill to allow entry of the private sector, both Indian and foreign, in the insurance business. It was arguably the first major economic decision taken by the Vajpayee government.

Nine years later, in 2008, the Insurance Laws (Amendment) Bill was introduced in Parliament by the UPA government to increase the cap on foreign investment in Indian insurance companies from 26 per cent to 49 per cent. In December 2011, the Parliamentary Standing Committee on finance, headed by the BJP MP Yashwant Sinha, stated that a further hike in the FDI limit may not be in the interest of the Indian insurance industry and that the government should consider an alternate route of tapping domestic capital markets. The BJP is now singing a different tune.

As in 1998, 1999, and even today, sections within the Sangh Parivar, including the Swadeshi Jagaran Manch (SJM) and the Bharatiya Mazdoor Sangh (BMS), the trade union affiliate of the BJP, have had serious reservations about the desirability of allowing foreign insurance companies to increase their stakes in Indian companies. The opposition by the SJM and the BMS will probably be ignored by the Modi government as the balance of power within the Sangh Parivar seems to have shifted clearly in favour of the so-called “pro-reforms” section which includes finance minister Arun Jaitley.

Insurance penetration, defined as the ratio of the total premium underwritten in a given year to the country’s gross domestic product, has slipped every year — from 5.2 per cent in 2009 it was down to 3.96 per cent in 2012. Whether more foreign investment will ensure wider insurance penetration and encourage financial savings among the poor and even the middle classes is far from certain.

The writer is an educator and commentator